Principal Issues: Whether the CRA will generally grant relief to taxpayers with respect to the late-filed election penalty of subsection 220(3.5) where the taxpayer was not aware that the section 86.1 election exists or was not aware that an eligible distribution was made.
Position: No.
Reasons: The Minister's discretion to waive a penalty under subsection 220(3.1) is to be exercised on a case-by-case basis following the guidelines published in IC 07-1.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE, OCTOBER 10, 2014
2014 APFF CONFERENCE
Question 4
Reorganizations of foreign corporations with spin-off and late election
On April 15, 2002, the CRA announced that the election under ITA section 86.1 had been added to the list of elections that could be filed late. This list is provided for under ITR paragraph 600(c). Briefly, the section 86.1 election permits avoidance of the taxation of a foreign dividend resulting from the distribution of shares of another corporation (such as a subsidiary) carried out by a foreign corporation. Various requirements are set out in section 86.1 for there to be an "eligible distribution". A number of US.. corporations listed on the New York Stock Exchange have made such distributions in the last decade.
In addition to avoiding the taxation of a foreign source dividend as a result of the distribution, the election effectively results in a division of the ACB of the shares of the corporation already held by the taxpayer, between those shares and the shares distributed by the corporation, based on the fair market value ("FMV") of each of them at the time of distribution. Thus, the tax burden associated with the distribution of shares is ultimately reduced significantly if the election is made. This election also reflects the taxpayer's lack of actual economic enrichment at the time of distribution. It is not unusual to find in practice that the amount of the foreign dividend otherwise triggered by the distribution is far from negligible in relation to the cost or FMV of the shares held by the taxpayer.
That said, for many taxpayers who are not tax specialists, these little-known provisions may result in their failing to benefit from these advantageous rules, often because of ignorance of an available election or, in some cases, ignorance that such an "eligible" distribution has occurred. In addition, not all distributions made by foreign corporations are eligible.
Question to the CRA
The late election under section 86.1 has been in existence for over 12 years, and the CRA has accumulated sufficient experience to date. In order to assist taxpayers in making a decision on whether or not to make a late election, can the CRA provide a concrete and practical indication as to whether late filing is generally accepted without application of the penalty of $100 per month (to a maximum $8,000) if the failure to file an election at the required time is attributable solely to ignorance of the availability of the election under section 86.1 or ignorance that there was an eligible distribution?
CRA response
The CRA does not intend to provide systematic administrative relief in the situation described in the question. The penalty provided under subsection 220(3.5), which is applicable inter alia where there was a request for extension of the deadline for making an election described under ITR section 600 (which includes the election under paragraph 86.1(2)(f)), pursuant to subsection 220(3.2), may be the subject of a waiver application under subsection 220(3.1) Each situation must be considered on a case-by-case basis and the Minister has discretion in making her decision. This discretion is exercised in light of the guidelines provided in Information Circular 07-1, Taxpayer Relief Provisions, May 31, 2007.
Hugo Gravel
(613) 957-2058
2014-053483